The five things micro VC fund Floodgate looks for in a team
Mike Maples Jr., one of Silicon Valley’s top angel investors and current partner at Floodgate Fund, believes firmly in investing in thunder lizards.
His class discussion on January 15, 2013 at Stanford’s Graduate School of Business’ course on Entrepreneurship and Venture Capital detailed exactly what these thunder lizards are, what he looks for when investing, and facts about the Floodgate fund and team.
Thunder Lizards
“A thunder lizard is a game changing company that will massively outperform the rest of the industry,” explained Maples, citing Twitter as an example. “The investment in Twitter has returned 200x. Thunder lizards are rare. If in a given year there are 10,000 startups that get funded by angels and 1,500 get a Series A funding, then 80 companies will likely do well but only 12 will be a ‘thunder lizard’.”
According to Maples, thunder lizards reflect how the success of startups generally follows a power law distribution. Maples discussed how in a YCombinator cohort, the best company is worth more than all of the others combined. Similarly for most VC portfolios, the best company’s returns will exceed all of the other companies invested. The second best company’s value will also surpass the value of all other companies in the portfolio, excluding of course the most valuable one. Maples mentioned that the power law also applies to the movie industry (box office revenues) and web sites (page views).
How Floodgate Invests
Floodgate, a micro VC fund, invests in enterprise and consumer software and occasionally hardware. Floodgate assumes more risk than typical VCs with their investments because they tend to invest earlier and at lower valuations. Floodgate looks for five things in a team:
1. a visionary entrepreneur
2. the matching of the entrepreneurs’ life stories with their current pursuits (an authentic entrepreneur)
3. a huge potential market
4. startups with a fundamental advantage
5. modest capital requirement.
Evan Williams of Twitter is a prime example of a visionary entrepreneur. Maples asked Williams what he would do next when Williams tried to return Maples his money in Odeo. When Williams first described Twitter, Maples wasn’t even sure what it entailed. There was no revenue model or roadmap. Maples however trusted Williams’ instincts given Williams’ earlier success in Blogger. Maples believed that Williams had a strong instinct as to how modes of communications were changing.
Maples said that “at Floodgate, we don’t talk ourselves out of the crazy deals because our early successes (Twitter and Chegg) felt kind of crazy.” And that Floodgate invests “between $100,000-$2 million in each deal and we raised $75 million in our current fund.”
Maples stated that it is critically important that entrepreneurs have a unique understanding of a trend and have a non-consensus view because they know something the rest of the world doesn’t.
ModCloth, an indie fashion company, is an example of an authentic entrepreneur that Floodgate looks for in founding teams. Susan Koger, the Modcloth cofounder began thrifting for indie retro vintage clothes as a teenager and from there began to sell clothes out of her dorm room. She immediately realized that there was a huge demand for this type of clothing and the company has since grown to 275 employees. Susan “can still be found out on the road” looking for retro vintage clothing.
According to Maples, Floodgate generally knows which teams are the winners within 36 months and very often within 18 months. By that time a company is often able to prove whether Floodgate’s investing hypothesis was valid.
Maples said that “good entrepreneurs like to know where they stand.” And “perhaps the greatest sin is to have a very talented person chase a dumb idea in the prime of their lives.” He added that sometimes it’s not “the entrepreneur that sucks but the business.”
Thoughts on the Industry
Maples believes that someday historians will analogize the tech industry to the Renaissance era. He said that the massive innovations produced by the tech industry have changed how people live and work. And that most of these disruptions have been concentrated in Silicon Valley and, to a much lesser extent, in the Boston corridor.
Maples believes that most people in Stanford and Silicon Valley have the faulty belief that most startups need VCs. He wholeheartedly rejects this notion and said that many people also radically underestimate the risk of a startup.
The Floodgate Team
Floodgate is comprised of only two people: Maples and Ann Miura-ko, who joined the team after Floodgate’s second fund raised 35 million in 2008.
Mike said that Ann complements his personality because he tends to be an improviser and marketer whereas she is “more focused, technical, and able to think about innovating in processes and methods.” This collaboration enables Floodgate to no just “come up with breakthrough insights” but then “convert them into durable programs.”
Mike cited that more than half of consumers on the internet are females and thus having Ann on the team gives Floodgate the ability to identify promising companies like Modcloth. He said that some tech enthusiasts and VCs don’t appreciate that females are the primary consumers on the internet.
Floodgate’s Success
Maples became a micro VC after drawing a diagram to for a well-regarded venture capital LP that identified a space between angels and VCs. He then described how startups typically need funding that is below the typical dollar amount VCs fund but yet above what angels generally seed.
“At the time, there was no reason for a VC to inch closer to angel money and angels didn’t have the capital to inch closer to the VC space,” he said.
For aspiring VCs, Maples claims the key is to “get lucky your first five years,” citing himself as a prime example. Floodgate’s first few deals were Twitter and Chegg. “At Floodgate we did a few things that were right. We focused on people flow as opposed to deal flow,” he said.
Twitter, for example, provided Maples with a better idea about what would be the next big thing and how Floodgate should think about future investments. This approach is what Maples called “getting lucky and then leveraging it.”
Entrepreneurship and Venture Capital is taught by Peter Ziebelman and John Glynn.
